Professional Documents
Culture Documents
RESEARCH SPOTLIGHT
Potential benefits.
Share the cost of analyzing proxy issues across multiple funds.
Provide expertise on issues that funds might not afford to examine individually.
Potential costs.
Proxy advisor guidelines might reflect a one-size-fits-all approach to governance.
Standards might by too inflexible; not allow for differences across firms.
Proxy advisors themselves might not be sufficiently resourced to evaluate all
items, particularly complicated issues.
Research shows that proxy advisors are highly influential over voting outcomes and
pay plan design.
INFLUENCE ON VOTING OUTCOMES
Bethel and Gillian (2002) study the impact of ISS recommendations on proxy
proposals.
Cai, Garner, and Walkling (2009) study the impact of ISS recommendations on
director elections.
Find that directors that do not receive ISS support receive 19% fewer votes
(77% versus 96%).
Ertimur, Ferri, and Oesch (2013) examine the impact of proxy advisory firm
recommendations on say on pay votes.
Find that:
A negative recommendation from ISS is associated with a 24.7% reduction in
shareholder support; GL: 12.9% reduction; both ISS & GL: 38.3% reduction.
Influence is not uniform. Large funds are less influenced than small funds.
Causality is uncertain. Reduction in support caused by ISS might be as little as 5.7%.
Our findings suggest that [proxy advisors] key economic role is processing a substantial
amount of executive pay information on behalf of institutional investors, hence reducing
their cost of making informed decisions.
INFLUENCE ON VOTING OUTCOMES
Malenko and Shen (2016) also examine the impact of ISS on say on pay.
Measure the difference in voting outcomes for firms with similar pay plans that
receive different voting recommendations from ISS.
Conclusion: ISS has significant influence over say on pay voting outcomes.
Alexander, Chen, Seppi, and Spatt (2010) study the role of ISS
recommendations in proxy contests.
Gow, Larcker, McCall, and Tayan (2013) study the influence of ISS on equity
compensation plan design.
Companies design plans to closely meet ISS allowable limits for dilution.
34.1% of all plans are within 1% of ISS limits.
96% of these are <1% below;
only 4% are <1% above.
Larcker, McCall, and Ormazabal (2013) examine the impact of ISS guidelines
on stock option repricing plans.
Find that:
Plans that require shareholder approval are significantly more likely to conform to
ISS criteria than those that do not require approval.
Plans that meet ISS criteria exhibit lower stock market reaction, lower future
operating performance, and higher employee turnover.
Conclusion: ISS has significant influence over the design of repricing plans,
and this influence is negative.
These results are consistent with the conclusion that proxy advisory
firm recommendations are not value increasing for shareholders.
INFLUENCE ON COMPENSATION DESIGN
Larcker, McCall, and Ormazabal (2015) examine the impact of proxy advisory
firm recommendations on say on pay.
Find that:
Companies whose plans are likely to receive a negative recommendation are
significantly more likely to amend their plan to gain the approval of ISS and GL.
Shareholders react negatively to these changes.
Conclusion: Proxy advisory firms have significant influence over the design of
pay plans, and this influence is negative.
[The influence of] proxy advisory firms appears to have the unintended economic consequence
that boards of directors are induced to make choices that decrease shareholder value.
CONCLUSION
Research generally shows that proxy advisory firms are highly influential
over voting outcomes.
Still, most research finds that ISS and Glass Lewis can swing up to 20% of
the vote, depending on the matter of the proposal.
Research also shows that proxy advisors have significant influence over pay
design. Shareholders generally react negatively to changes made to satisfy
proxy advisors.
Jennifer E. Bethel and Stuart L. Gillan. The Impact of the Institutional and Regulatory Environment on Shareholder Voting. Financial
Management. 2002.
Jie Cai, Jacqueline L. Garner, and Ralph A. Walkling. Journal of Finance. 2009.
Angela Morgan, Annette Poulsen, and Jack Wolf. Journal of Corporate Finance. 2006.
Yonca Ertimur, Fabrizio Ferri, and David Oesch. Shareholder Votes and Proxy Advisors: Evidence from Say on Pay. Journal of
Accounting Research. 2013.
Nadya Malenko and Yao Shen. The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design. Review of
Financial Studies. 2016.
Ian D. Gow, David F. Larcker, Allan L. McCall, and Brian Tayan. Sneak Preview: How ISS Dictates Equity Plan Design. Stanford Closer
Look Series. 2013.
David F. Larcker, Allan L. McCall, and Gaizka Ormazabal. Proxy Advisory Firms and Stock Option Repricing. Journal of Accounting
and Economics. 2013.
David F. Larcker, Allan L. McCall, and Gaizka Ormazabal. Outsourcing Shareholder Voting to Proxy Advisory Firms. Journal of Law
and Economics. 2015.
Cindy R. Alexander, Mark A. Chen, Duane J. Seppi, and Chester S. Spatt. Interim News and the Role of Proxy Voting Advise. Review of
Financial Studies. 2010.